Domain's Property Price Forecasts - June 2019 - Your Place Real ...

Domain’s Property Price
Forecasts – June 2019
TRENT WILTSHIREJUN 26, 2019

DOMAIN.COM.AU

Introduction and key findings
Australia’s capital cities are expected to see property price falls end
this year before experiencing modest price growth in 2020.
Property prices have continued to fall in Sydney and Melbourne in
2019, extending the correction that began in 2017, but price declines
should end later this year. Hobart’s boom is petering out, with only
modest price growth expected in 2020. The outlook for Perth is also
for some modest price growth next year, but the bottom of the market
has been called before, so there is a risk that weakness will continue.
Brisbane unit prices should stabilise as the apartment construction
boom ends, while Canberra’s ongoing building boom will keep a lid on
unit price growth in the nation’s capital.
There have been significant changes to the outlook since
our November 2018 forecasts were released. The start of 2019 was
weaker than we expected, with the financial services royal
commission, a slowing economy, investor caution and election
uncertainty weighing on prices. But in recent weeks, a number of
changes point to a turnaround in the second half of 2019: the Reserve
Bank has cut interest rates with further reductions to come, there will
be no changes to negative gearing rules, and the banking regulator has
changed a key lending rule that will make it easier for people to
borrow.

But still, we expect only modest price growth in 2020. While low
interest rates and strong population growth should support prices,
tight lending conditions persist, household debt remains high, which
means households and investors are cautious, and elevated prices
means housing affordability is still a problem. On top of that,
the economy is slowing, with growth in household incomes expected
to remain weak.
About the forecasts
We have forecast median house and unit prices for the six months
from the June quarter 2019 to the December quarter 2019, and then
prices changes over the year to the end of 2020.
Economic modelling and analysis of market leading indicators have
been used to produce our forecasts. The forecasts are based on the
most likely future scenario. House and unit price forecasts are based
on Domain Group’s stratified median price series, so there will be
significant variation in price growth within cities. Due to the
uncertainty involved in forecasting, the 2020 price forecast is
presented as a range.
Forecast variables used in our economic modelling are derived from
the Reserve Bank’s forecasts, Australian and state treasury forecasts,
and other sources (see Key assumptions). Important inputs are an
expectation of two cash rate cuts (in July 2019 and November 2019),
national population growth of 1.75 per cent each year, a steady
national unemployment rate of 5 per cent, and modest growth in
home lending from late 2019.

                            House price forecasts
                                      2019 (6 month change)   2020 (annual change)

Australia (combined-capital cities)                      1%                 2% – 4%

Sydney                                                              2%                      3% – 5%

Melbourne                                                           1%                      1% – 3%

Brisbane                                                            1%                      3% – 5%

Perth                                                               0%                      0% – 2%

Adelaide                                                            1%                      1% – 3%

Hobart                                                              0%                      2% – 4%

Canberra                                                            2%                      4% – 6%

Notes: Stratified median house price forecasts. 2019 forecast is 6 month per cent change from June
quarter 2019 to the December quarter 2019. 2020 forecast is the annual per cent change from December
quarter 2019 to December quarter 2020. Darwin excluded from forecasts due to small volumes and
market volatility.

                                Unit price forecasts
                                             2019 (6 month change)          2020 (annual change)

Australia (combined-capital cities)                                 1%                      1% – 3%

Sydney                                                              2%                      2% – 4%

Melbourne                                                           1%                      0% – 2%

Brisbane                                                            0%                      0% – 2%

Perth                                                               0%                      0% – 2%

Adelaide                                                            2%                      1% – 3%

Hobart                                                              2%                      3% – 5%

Canberra                                                            1%                      1% – 3%

Notes: Stratified median house price forecasts. 2019 forecast is 6 month per cent change from June
quarter 2019 to the December quarter 2019. 2020 forecast is the annual per cent change from December
quarter 2019 to December quarter 2020. ‘Units’ includes units and apartments. Darwin excluded from
forecasts due to small volumes and market volatility.

Australia (combined-capital cities)

The big changes that have occurred since the start of May should
contribute to combined capital city property price falls slowing, with
prices bottoming out in spring 2019. Over the six months to December
2019, house and unit prices are forecast to grow by one per cent. In
2020, we predict house prices to grow by 2 to 4 per cent and unit
prices to grow by about one to 3 per cent.
A number of timely indicators point to prices bottoming out in coming
months. Clearance rates are at their highest point in over
a year (although auction volumes remain low). Domain’s monthly
price data and other high-frequency price data shows that price falls
have slowed. There is growing buyer interest, with the number of
people attending each open for inspection up by 15 per cent compared

to before the election. The Westpac-Melbourne Institute survey shows
that more consumers think prices are close to turning around and that
now is a better time to buy a dwelling. And more people are applying
for a home loan.
Beyond these short-term indicators, other factors should underpin
modest price growth over the next 18 months. Treasury is forecasting
annual population growth of 1.75 per cent over the next few years,
which is higher than previously predicted. Lower interest rates
have increased property prices in the past and, while the effect of
lower interest rates may be more muted now, lower rates should still
push up prices. In addition, new housing construction is declining,
which will also support price growth (building approvals are down by
20 per cent compared to a year ago). But high household debt,
affordability problems and a slowing economy mean that there will
only be modest price growth in 2020.
Sydney

Sydney is experiencing the biggest correction in nominal house prices
since the 1980s, but we forecast that price falls will end later this year,
with house and unit prices increasing by 2 per cent over the next six
months. In 2020, the modest turnaround will continue, with house
prices expected to increase by 3 to 5 per cent over the year, and unit
prices forecast to rise by 2 to 4 per cent. Even following this period of
substantial price falls, Sydney median house and unit prices are
currently 60 and 40 per cent higher than in 2012.
There are now some clear signs of Sydney prices bottoming out, with
the median house price likely to remain just above $1 million in 2019,
and the median unit price is expected to dip just below $700,000.
Clearance rates are at around 60 per cent, which is the highest point in

15 months, open for inspection attendance is 17 per cent higher
than before the election, and more frequent price data shows prices
are stabilising. All these factors, in combination with the impact of
lower interest rates and changes to lending rules, support our forecast
that prices will bottom out in spring.
Looking into 2020, low interest rates, stronger population growth and
ongoing low unemployment (4.5 per cent in NSW and even lower in
Sydney) will support price growth. Home lending is expected to grow
at 2 per cent a year due to a turnaround in sentiment and lower
interest rates. While modest, a pick-up in lending will support a
turnaround after lending fell 20 per cent over the past year. Fewer
Sydney apartments will hit the market in 2020, which will also
support prices. But due to housing affordability in Sydney still being a
big problem, prices will likely only grow modestly in 2020.
Melbourne

Melbourne house and unit prices have fallen 11 per cent and 8 per
cent respectively from their peaks, and they will fall a bit further,
before prices bottom out in spring 2019. We predict that house and
unit prices will increase by one per cent between June and December
2019, ending the year at approximately $800,000 and $470,000
respectively. In 2020, we forecast that house prices will grow by one
to 3 per cent and unit prices by zero to 2 per cent. By the end of 2020,
Melbourne house prices are expected to be about 10 per cent below
their 2017 peak, but still be 50 per cent higher than they were in
2012.
There are signs of increasing buyer interest. Clearance rates are
averaging above 60 per cent over the past four weeks, which is the

highest point in over a year. Clearance rates in Melbourne’s more
expensive areas are strongest, which is an important indicator as the
top-end of the Melbourne market generally leads the overall market.
The average number of attendees at open for inspections is up 16 per
cent compared to before the election. Domain’s monthly price data
also shows that Melbourne price falls have slowed.
Melbourne property prices will be boosted by lower interest rates and
strong population growth of about 2 per cent. In addition, the
unemployment rate is expected to fall in the year ahead.
A slowdown in new housing construction will also support price
growth, but elevated prices and the Melbourne market tending to be
six months behind Sydney in this cycle mean it’s unlikely prices will
jump significantly in 2020.
Brisbane

In the next six months, we forecast Brisbane house and unit prices to
bottom out, with house prices expected to increase by one per cent
and unit prices to be unchanged. House prices are then expected to
grow by 3 to 5 per cent and units by zero to 2 per cent in 2020.
Brisbane house prices fell by 2 per cent since the second half of 2018.
Unit prices have fallen by about 10 per cent from their 2016 peak.
There are some signs of a turnaround in Brisbane (and south-east
Queensland more broadly). The average number of attendees at open
for inspections is up 15 per cent compared to before the election. But
auction clearance rates remain weak and prices are still falling slowly.
The unemployment rate is expected to remain elevated in Queensland
(at 6 per cent) and although the Brisbane apartment construction

boom is ending, there are still a significant number of apartments
coming onto the market. Relative affordability has made Brisbane and
south-east Queensland attractive compared to Sydney and
contributed to strong interstate migration. This is expected to
continue, with annual population growth remaining at 1.75 per cent in
2020. Low interest rates and a lower Australian dollar will also boost
the Queensland economy and property prices. House prices are also
likely to turnaround in the Gold Coast and Sunshine Coast, although
we expect a smaller pick-up as these coastal cities look relatively
overvalued compared to Brisbane.
Perth

Perth house and unit prices are expected to bottom out in spring, to be
unchanged over the six months to December 2019. At the end of 2019
the median house price is forecast to be about $520,000, about 15 per
cent below the 2014 peak, and the median unit price $330,000. In
2020, our model suggests a rebound in Perth prices, but given the
entrenched weakness in the Perth market, we have forecast only
modest price growth of zero to 2 per cent for houses and units.
A number of fundamental drivers of prices suggest a turnaround for
Perth. Annual population growth is predicted to increase to 1.5 per
cent in 2020 (from 0.9 per cent in 2018), interest rates are lower, the
Australian dollar has fallen, the mining outlook is now much stronger,
there is growing demand for workers and unemployment is expected
to fall. But this more positive outlook for Perth has existed for a while
and property prices have continued falling, mortgage arrears are
rising and more households are in negative equity. So while we
predict some price growth in 2020, there is a high risk that price falls
could continue.
Adelaide

We forecast ongoing modest property price growth in the next six
months, with house prices expected to increase by one per cent and
unit prices forecast to grow by 2 per cent. In 2020 we predict property
price growth of one to 3 per cent. Adelaide house prices have risen
steadily at about 3 per cent per year in recent years (units have grown
at about 2 per cent annually), although prices have stabilised in 2019.
Home lending has fallen by less in South Australia than in other states,
so there may be less of a rebound. Compared to other states, there has
been a smaller boost in buyer interest following the election. South
Australian population growth is also predicted to be modest, and the
jobs outlook is soft.
Hobart

Hobart house and unit prices increased by around 40 per cent over
the past three years, but so far in 2019 prices have flatlined. Over the
next six months we expect Hobart house prices to be steady and unit
prices to grow by 2 per cent. In 2020, we forecast house price growth
of 2 to 4 per cent and price growth of 3 to 5 per cent for units.
Hobart’s property market has been boosted by stronger population
growth, investors looking for higher yields and a tourism
boom underpinned by a weaker Australian dollar and the “MONA
effect”. These drivers are likely to continue, but they may wane. In
addition, new housing construction is catching up to the pick-up in
demand, which will help limit price growth (the 12-month sum of
Tasmanian building approvals is 26 per cent higher than the previous

year). Investors have also started looking beyond Hobart to other
parts of Tasmania, particularly Launceston.
Canberra

Our forecast for the rest of 2019 is for Canberra house prices to
increase by 2 per cent and unit prices to increase by one per cent. In
2020, we predict stronger house price growth of 4 to 6 per cent and
modest unit price growth of one to 3 per cent.
Canberra house prices have fallen since late 2018, but this followed
solid price gains in the previous four years. In contrast, Canberra’s
median unit price has fluctuated between $400,000 and $440,000
since 2010, with prices held down by record rates of new
construction.

The election of a Labor government usually contributes to higher
Canberra property prices due to the expectation of more public sector
jobs. But Labor’s proposed tax changes were likely to push prices
down a bit further, so the Coalition’s surprise win should give
Canberra property more of a boost.
Price growth will be underpinned by strong population growth and
low unemployment. Ongoing high levels of new apartment building
will keep unit prices from rising (unit, apartment and townhouse
approvals over the past 12 months are 30 per cent higher than in the
previous year). As in other states, investor borrowing is expected to
increase modestly from late 2019 after falling for the past 18 months.
Upside risks to price forecasts
Investor lending picks up faster than expected
The value of home loan lending is down 17 per cent over the year to
April. Our forecasts assume modest annual growth in lending of about
2 per cent from late 2019.
But there is a possibility that a turnaround in property prices may
change sentiment and encourage people to borrow, particularly
investors. There are also reports that more banks are becoming
more willing to lend. This could see a faster pick-up in home lending,
which would see prices grow faster than predicted.
Lending could potentially fall further than our conservative forecast,
but this seems less likely. There are two main factors that could see
lending fall further. First, banks are introducing comprehensive credit
reporting. Second, the Westpac v ASIC case before the Federal Court
could potentially require banks to meet stricter responsible lending
laws.
Unemployment falls while interest rates are cut
The RBA is cutting interest rates because economic growth is soft,
inflation is below the RBA’s 2 to 3 per cent target range and
unemployment is now trending upwards. The RBA recently stated that

it is aiming for a lower unemployment rate than previously, and that it
will take lower interest rates to reach this new target. So it is possible
that lower interest rates will accompany a falling unemployment rate,
which is unusual because interest rates would normally be cut when
unemployment is rising, which will give a boost to property prices.
Interest rates are cut faster than forecast
We have forecast two further rate cuts, which will bring the cash rate
to 0.75 per cent by the end of 2019. But there is a possibility that rates
will be cut further, or faster, or that the RBA implements other
forms of monetary stimulus, which provide a bigger boost to property
prices. Rate expectations continue to fall: on June 11, 2019 there was
only a 4 per cent chance of rates being cut from 0.75 per cent to 0.5
per cent by mid-2020, on June 20 the probability of a cut had
increased to almost 50 per cent. Of course, the impact of the RBA’s
rate cuts will be affected by how much of any future cuts are passed
on to borrowers, and there is a limit to how far the RBA can cut the
cash rate.
Property market sentiment rebounds faster and by more than
expected
Property prices have “momentum”. When prices turn around and start
rising, this encourages investors and other buyers into the market
who see the opportunity for capital gains, pushing prices up further.
While our model captures price momentum, we have adjusted the
output to moderate the impact of a turnaround in sentiment due to
the overhang of high household debt, tight lending conditions and
weak income growth. But there is the possibility that sentiment may
rebound more significantly, which will spark a bigger turnaround in
prices.
Downside risks to price forecasts
Global slowdown triggered by a trade war drags on Australia’s
economy

The US-China trade dispute continues to escalate, which increases the
chances of a sharp economic slowdown in Australia. A trade war
would impact global growth by slowing trade as well as affecting US-
Australia trade and battering global confidence. This would impact
Australia’s property market.
However, if a full-blown trade war did eventuate, a lower exchange
rate and a lower cash rate rate would help to insulate Australia’s
economy, with very low interest rates potentially shielding Australia’s
property market from a major downturn.
Rising unemployment, driven by a construction slowdown, causes
forced selling
The outlook for the construction sector has worsened in 2019.
Building approvals data points to a slowdown in new construction in
the next couple of years.
Because construction is a significant employer, a slowdown in
construction may push up the unemployment rate. A significant rise in
unemployment may see more people forced to sell their homes or
their investment properties, which would push down prices. But on
the other hand, if the construction pipeline is lower than expected, this
would provide some support to property prices.
Owner-occupiers and investors don’t borrow in response to lower
interest rates
Lower interest rates and APRA’s changes to the serviceability buffer
will increase the maximum borrowing capacity of most borrowers,
particularly owner-occupiers. This will likely translate into some new
borrowers borrowing more (RBA research has found that only about
13 per cent of borrowers took out close to the maximum amount they
were offered).
But as household debt is at a record high level, households may not
borrow much more, and banks continue to lend cautiously following
the royal commission and APRA’s instruction to examine household

expenses more closely. As a result, the boost to borrowing power may
lead to only a small increase in actual borrowing.

Key assumptions
     – Median prices for the June quarter 2019 are estimated based on partial data and
     leading indicators of prices.